Fiscal policy is the management of the economy through which instruments?

• A. Regulation of monetary policy by central bank
• B. Management of the economy via government spending and taxation
• C. Trade policy with other nations
• D. Regulation of financial markets

Answer: (B)

Fiscal policy is the management of the economy through government spending and taxation. By adjusting how much is spent and how much people are taxed, the government can influence overall demand in the economy. If the economy is weak, expansionary measures—boosting spending or cutting taxes—put more money into people’s pockets and raise demand, helping output and employment. If demand is too high and inflation is a risk, contractionary measures—reducing spending or raising taxes—cool demand.

This set of tools is distinct from monetary policy, which uses the central bank to influence the money supply and interest rates, and from other instruments like trade policy or financial regulation, which affect the economy in different ways. Automatic stabilizers, such as unemployment benefits and progressive taxes, also work within fiscal policy to smooth out cycles without new legislation.